How to Calculate a Debt to Income Ratio

Financial institutions use debt to income ratios (D / I) to decide how much risk is involved when lending money to you. Why not figure this out on your own before you apply for a loan? Follow the simple steps below to find your D / I ratio.

First, you need to find your gross monthly income. This is listed on your pay stub or leave and earnings statement. If you do not receive a pay stub, you can use the W-2 form that you receive at the end of the year from your employer.

Second, you need to know the total minimum monthly payments you make each month toward debts. The easiest way is to review your monthly bill statements to find the minimum amount due each month. Another way is to find payments listed on your credit bureau report (CBR). If you do not have a copy of your CBR, then you can obtain a free copy of your credit report once a year from an online source, or contact your financial institution for more information. On the CBR from TransUnion, the monthly payment will be listed under TRADES> TERMS. Depending on the company (TRADES) they can report your debt as "Min97" which means Min payment is $ 97, or "24M204" which is 24 monthly payments (TERMS) at $ 204 a month. The minimum and monthly payment, and monthly term, will be different for each person depending on what is owed. You can also contact each company that you pay a monthly payment to and find out the minimum monthly payment amount. Do not forget to ask if they report to the credit reporting bureau agency.

Finally, once you have the gross monthly income and your total minimum monthly payments of your debts, you divide your total minimum payments by your gross monthly income.

See calculation example below:

Total Minimum Monthly Payments (debt) = $ 1,000

Gross Monthly Income (income) = $ 2,000

Divide $ 1,000 by $ 2,000 = .50 or 50% debt to income (D / I) ratio

So, what does this mean for you? This means that 50% of the money you make goes to debts. How do you feel about that? Great I hope! If you have a 100% debt to income (D / I) ratio that means you have no money left for essential needs like food. Having 50% debt probably means you are living paycheck to paycheck, but able to pay all of your bills on time, go out to eat once in a while, or go on vacation. Now you know, it can be good that the D / I ratio is at 50%, but what do financial institutions think if you have a 50% D / I ratio?

Financial institutions know you need some debt in order to build a credit score. They prefer your D / I ratio to be under 50%; ideal is 30%; best is under 10% because that means you have more money to pay back your loans.

Beware! There are some financial institutions that will loan you money if you have a higher D / I ratio, but they usually charge extremely high interest rates-making it very difficult to pay back. You can always call and see if they will tell you what their requirements are to obtain their lowest rate.

Calculating your debt to income ratio helps you be in control of your finances and helps financial institutions determine loan risk. What's your D / I Ratio?